Q1 2023 Lear Corp Earnings Call
Speaker 2: Good morning everyone and welcome to the Lear Corporation first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please send to a conference specialist by pressing the star key followed by zero.
Speaker 2: After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded.
Speaker 2: At this time, I'd like to turn the floor over to Ed Lowensfeld, Vice President, Investor Relations. Sir, please go ahead. Sir, please go ahead.
Speaker 3: Thanks, Jamie. Good morning, everyone, and thank you for joining us for Lear's first quarter 2023 earnings call. Presenting today are Ray Scott, Lear president and CEO , and Jason Cardew, senior vice president and CFO . Other members of Lear's senior management team have also joined us on the call.
Speaker 3: Following prepared remarks, we will open up the call for Q&A. You can find a copy of the presentation that accompanies these remarks at ir.leard.com.
Speaker 3: Before Ray begins, I'd like to take this opportunity to remind you that as we conduct this call, we will be making forward-looking statements to assist you in understanding Lear's expectations for the future. As detailed in our safe harbor statement on slide 2, our actual results could differ materially from these forward-looking statements due to many factors discussed in our latest 10Q and other...
Speaker 3: today's call is on slide three. First, Ray will review highlights from the quarter and provide a business update.
Speaker 3: Jason will then review our first quarter financial results. Finally, Ray will offer some concluding remarks. Following the formal presentation, we would be happy to take your questions. Now I'd like to invite Ray to begin. Thanks, Ed. Now please turn to slide 5, which highlights key financial metrics for the first quarter.
Speaker 3: Their start of the year strong, delivering significant increases in both revenue and earnings in the first quarter compared to last year. Sales increased 12% to 5.8 billion dollars and core operating earnings increased 43% to 263 million dollars.
Speaker 3: Slide 6 outlines key highlights from the quarter. Both seeding and e-systems had significant growth over market and higher margins as compared to last year.
Speaker 3: In seeding, we are excited to announce that the Conquest Award we mentioned on our last earnings call is for the Laganyr and Grand Laganyr. There will be producing complete seeds and key thermal components.
Speaker 3: In this meeting, we are excited to announce that the Conquest award we mentioned on our last earnings call is for the Wagoneer and Grand Wagoneer. Here we will be producing complete seats and key thermal components for these vehicles.
Speaker 3: with production beginning later this year. This Conquest Award is another example of their strong reputation for quality, operational excellence, and product execution as we expand our strong relationship and partnership with the LONUS.
Speaker 3: In these systems, we continue to increase momentum in electrification with additional awards for two of our innovative products. Stolinas recognized our advanced technical capabilities as the premier supplier of high performance battery disconnect units and selected Lear to supply the BDU for a new electric vehicle.
Speaker 3: We continue to increase our inner-cell connect board backlog.
Speaker 3: with the award of additional volumes from General Motors to support their Altium battery platform.
Speaker 3: Our customers continue to recognize Lir for innovative technology and quality.
Speaker 3: For the sixth consecutive year, we are recognized as a Supplier of the Year for General Motors. I'm excited that we completed the acquisition of IGB, which will play a key role in expanding our thermal comfort systems business and increasing our market share and margins in seeding. I want to thank everyone that supported this transaction.
Speaker 3: There's a lot of hard work and significant time spent to close this deal. It couldn't be more proud to welcome the IGV team to the Lear family. Quite seven provides a business profile of IGV and highlights the benefits of the transaction.
Speaker 3: IGB brings new technologies to LEER including active cooling, steering wheel heating, and occupant detection sensors.
Speaker 3: This transaction also complements the product capabilities we acquired from calensburg on kernure.
Speaker 3: and add scale to our growing thermal comfort systems business.
Speaker 3: IGB has a well-balanced customer base consisting of many of the world's largest global OEMs.
Speaker 3: This acquisition is the latest and final piece of our comprehensive thermal comfort strategy to extend LEER's leadership as the most vertically integrated automotive seat supplier.
Speaker 3: increase markets here and further strengthen our industry leading margin and return profile.
Speaker 3: Lear is the only company with this expertise to complete
Speaker 3: incomplete seats as well as comprehensive thermal comfort systems capabilities.
Speaker 3: These unique capabilities will drive transformation of the thermal comfort systems market by creating innovative designs that will improve performance, efficiency, and comfort while reducing weight and cost. On slide 8, I will walk you through the evolution of our thermal comfort systems product strategy.
Speaker 3: Today, many OEMs design and source each thermal component individually and package them together by layering them on top of each other.
Speaker 3: Several of these features rely on subcomponents that are redundant, increasing the number of parts and requiring more space for packaging.
Speaker 3: The acquisitions are conferred, NIGB, as well as the work we have done internally over the last 10 years developing and two-seating provide a broad-based capability to improve this model.
Speaker 3: At the time, leveraging best practices across the combined organization will improve efficiency and increase flexibility in our manufacturing facilities.
Speaker 3: Following the Kongsberg acquisition, our team has been working diligently to design more efficient thermal comfort modules by combining common functions across multiple components.
Speaker 3: For instance, we're developing a system that integrates ventilation with the lumbar and the massage modules.
Speaker 3: We also are developing innovative solutions to move thermal comfort components closer to the occupant.
Speaker 3: by integrating them directly into the trim covers. This will improve the performance of thermal comfort systems by increasing the speed to sensation for the occupant.
Speaker 3: It's also reduced the size of packaging within the scene.
Speaker 3: which facilitates integration of these features into the rear seats.
Speaker 3: Another innovative product we developed is Black's Air, a foam alternative that is 100% recyclable.
Speaker 3: Flex air reduces CO2 emissions by up to 50% and mass by up to 20% compared to traditional foam used in today's applications.
Speaker 3: These innovations are gaining traction with our customers. We currently have 15 development projects in process on 41 different car lines, with 7 OEMs for our various thermal comfort systems.
Speaker 3: Because our customers recognize the benefit of more efficient thermal comfort systems, they had begun to grant sourcing control of these products to live.
Speaker 3: Since Laird is the only JIT supplier with these capabilities, the additional sourcing control is limited just to us.
Speaker 3: This gives us an advantage in the marketplace, and we can provide higher performing and more efficient solutions to our customers.
Speaker 3: The final phase of our strategy is to combine our component modular solutions with our FlexAir Air Foam alternative.
Speaker 3: phase of our strategy is to combine our component modular solutions with our Flex Air Foam alternative and trim cover capabilities.
Speaker 3: to develop a fully integrated seed module by incorporating all of the thermal comfort components into an efficient modular design. We can drive significant part reduction and mass savings while enhancing the comfort for the occupant.
Speaker 3: These improvements will further reduce the cost of the thermal comfort system to our customers while increasing the value proposition for Lear Corporation.
Speaker 3: Slide 9 provides a pro forma outlook of our combined thermal comfort portfolio.
Speaker 3: The addition of the IGD product portfolio gives a strong market position each of the key thermal comfort categories.
Speaker 3: We estimate we have a top three market position for each major product.
Speaker 3: Co-forma 2022 revenue for the combined TCS business is $550 million.
Speaker 3: We expect this to grow to approximately $800 million by 2027.
Speaker 3: Revenue growth will come from a combination of industry factors and innovation.
Speaker 3: The overall thermal comfort market is estimated to grow over two percentage points faster than the vehicle production. With improved packaging, better performance, and reduced costs, we are confident that the market will grow more quickly as take rates increase and these products proliferate beyond the luxury segment and into the rear seat applications.
Speaker 3: Historically, our customers granted sourcing control for thermal comfort components on about 30% of the JIT programs.
Speaker 3: Given our increased capabilities, our opportunity to direct this sourcing has grown.
Speaker 3: Seven major customers have granted us 100% sourcing control for future thermal comfort systems.
Speaker 3: The unique competitive advantage we have developed in thermal comfort systems allows us to provide a better value proposition for our customers.
Speaker 3: which our competitors cannot match. Longer term, in addition to driving higher markets here, we believe...
Speaker 3: that our thermal comfort system strategy has the potential to drive our overall seating profitability above our current seven and a half to eight and a half percent margin target.
Speaker 3: Turning to slide 10, I will highlight some key business awards from the first quarter.
Speaker 3: The Conquest win for the Wagonier and the Grand Wagonier is a significant program that was included in our three-year backlog we announced in February .
Speaker 3: We also won an award to provide seats on a second program launching in late 2024.
Speaker 3: We estimate that combined revenue for these two programs could reach approximately $600 million in 2027.
Speaker 3: Since 2019, we have won $2 billion in conquest awards.
Speaker 3: 2019 we have won two billion dollars in conquest awards. It's a big number Frank.
Speaker 3: Thank you. Nice job. Given our strong pipeline of conquest opportunities we are pursuing, we expect this momentum to continue and result in additional market share gains.
Speaker 3: For each system, we continue to win awards in electrification as well as for high voltage and low voltage wiring on several EV platforms.
Speaker 3: The pace of new business wins in these systems this year is well ahead of where we were last year at this time. Just last week we were awarded the BDU for the new Stellanus electric vehicle.
Speaker 3: This win solidifies our position as one of the leaders in high performance BDUs.
Speaker 3: The additional volume awarded by General Motors for the ICB is another example of their confidence in our technical capabilities in increasing the value of our overall program. Our expected 2025 revenue on the platform has increased to $50 million.
Speaker 3: to over $100 million. We had expected this program to generate annual revenues of approximately $150 million.
Speaker 3: With the added volume, we now see peak revenue reaching $250 million.
Speaker 3: I'd like to turn the call over to Jason for the financial review. Thank you, Ray. Slide 12 shows vehicle production and key exchange rates for the first quarter. Global production increased 6% compared to the same period last year and was up 8% on a lear sales weighted basis.
Speaker 3: Production volumes increased by 10% in North America and by 17% in Europe , while volumes in China were down 8%. The dollar strengthened against both the euro and our base.
Speaker 3: Slide 13 highlights Lear's growth over market.
Speaker 3: For the first quarter, total company growth over market was 6 percentage points, driven by favorable platform mix and the impact of new business in both segments.
Speaker 3: with Seeding growing six points above market and E-Systems growing four points above market.
Speaker 3: Growth of a market was particularly strong in Europe and in China.
Speaker 3: In Europe , sales outperformed industry production by 12 points, with both business segments benefiting from higher volumes on the Land Rover, Range Rover, and Defender.
Speaker 3: New programs such as the BMW 7 Series and seating and new wiring and electronics content on the Volvo XC40 and XC40 Recharge and E-Systems contributed to the strong growth in the region as well.
Speaker 3: In China, growth of a market of 8 points resulted from strong production on the Mercedes C-Class and E-Class in seating, and the Volvo XC40 and XC40 Recharge in E-Systems.
Speaker 3: Our North America business lagged industry growth estimates by one percentage point. This is driven by unfavorable platform mix primarily related to the change over the Ford Escape and E-Systems, which is partially offset by the benefit of new business.
Speaker 3: Turning to slide 14, I will highlight our financial results for the first quarter of 2023. I will highlight our financial results for the first quarter of 2023.
Speaker 3: Sales increased 12% year over year to $5.8 billion. Excluding the impact of foreign exchange, commodities, and acquisitions, sales were up by 14% reflecting increased production on key leader platforms and the addition of new business. Core operating earnings were $263 million compared to $184 million last year.
Speaker 3: The increase in earnings resulted from the impact of higher production on their platforms and the addition of new business partially offset by the impact in foreign exchange.
Speaker 3: Adjusted earnings per share improved significantly to $2.78 as compared to $1.80 a year ago.
Speaker 3: First quarter operating cash flow was a use of $36 million. Operating cash flow is negatively impacted in the quarter by the timing of customer receipts as compared to last year and a significant increase in sales late in the quarter.
Speaker 3: Our outlook for fully operating and free cash flows unchanged.
Speaker 3: Slide 15 explains the variance in sales and adjusted operating margins in the seating segment.
Speaker 3: Sales for the first quarter were $4.5 billion, an increase of $540 million or 14% from 2022, driven primarily by an increase in volumes on leader platforms and our strong backlog.
Speaker 3: Excluding the impact of commodities for an exchange and acquisitions, sales were up 15%.
Speaker 3: Core operating earnings improved to $300 million, up 83 million, or 38%, from 2022, with adjusted operating margins of 6.7%. The improvement in margins reflected higher volumes on their platforms and an improvement in commodity costs, partially offset by higher engineering spending and launch costs to support our strongly- quo la IEP that supports increased Hoffman 18 which dollar Stafford Randolph
Speaker 3: or $1.4 billion, an increase of 97 million or 8% from 2022.
Speaker 3: Excluding the impact of foreign exchange and commodities, sales were up 12%, driven primarily by higher volumes on key platforms and our new business backlog.
Speaker 3: Core operating earnings improved to $49 million, or 3.5% of sales, compared to $42 million and 3.2% of sales in 2022.
Speaker 3: The improvement in margins reflected higher bonds on layer platforms and are margin-to-created backlog, partially offset by higher commodity costs and net up-customer recovery, the impact of foreign exchange and elevated launch costs. Moving to slide 17, we highlight our strong balance sheet and liquidity profile, a major competitive advantage for a layer in a rise in interest rate environment. The acquisition of IGV will be financed with the three-year fully-protabled term loan.
Speaker 3: We do not have any near-term outstanding debt maturities. Our earliest bond maturity is in 2027 and our debt structure has a weighted average life of approximately 14 years.
Speaker 3: Our cost of debt is low, averaging approximately 4%. In addition, we have $2.9 billion of available liquidity.
Speaker 3: We remain committed to returning excess cash to our shareholders, having repurchased $25 million for a footstock in the first quarter along with our quarterly dividend. Our current share repurchase authorization has approximately $1.2 billion remaining, which allows us to repurchase shares through the end of 2024.
Speaker 3: Now turning to slide 18. This slide highlights the key factors that will impact our financial outlooks.
Speaker 3: While our first quarter results were strong and industry production volumes are continuing to recover, there is still uncertainty around the pace of the recovery and overall global macro environment. As a result, we are not changing our full year outlook at this time.
Speaker 3: We expect a modest improvement in industry production levels this year, while remaining well below prior peak levels. We expect a gradual but sustained recovery and stretching into 2024 and beyond.
Speaker 3: The outlook for commodity costs is somewhat mixed. While we did see a significant reduction in steel prices late last year, prices in North America have since rebounded. We are seeing some moderation in select chemical commodity prices as well as freight and logistics costs but also experiencing higher component costs as our supply base contends with higher labor costs.
Speaker 3: On the positive side, we expect to largely offset the headlines we are facing through improved operating performance and negotiated sharing agreements with our customers.
Speaker 3: In addition, we are benefiting from resilient demand on luxury vehicles and other key platforms, as well as our margin-of-breed backlog.
Speaker 3: As we weigh these risks and opportunities, we continue to take aggressive steps to improve our competitive position and financial performance. We also continue to make significant progress through our Live Forward initiatives.
Speaker 3: including aggressive steps to improve capacity utilization and working capital management.
Speaker 3: and remain on track to meet or exceed a $50 million savings target for the year. These performance improvement actions, coupled with strategic investments and key products, such as thermal comfort systems and high voltage connection systems, have positioned both businesses for sustained revenue growth and margin expansion.
Speaker 3: Now I'll turn it back to Ray for some closing thoughts. Thanks, Jason. Please turn to slide 20.
Speaker 3: The first quarter was a great start to the year. Both business segments saw year-over-year margin growth with strong growth over markets.
Our leader forward plain continues to yield results. The team has identified and implemented actions that will reduce costs and improve operating cash.
We continue to win business in both seeding and yeast systems, and our pipeline of new opportunities is very strong.
Closing the IGB transaction was the final piece required to solidify our thermal comfort system strategy.
With this completed, we are looking forward to giving you a comprehensive update of our seating business with a particular focus on thermal comfort.
on June 27th. We'll be hosting a Seeding Product Day on the Lear campus in Southfield, Michigan.
We look forward to seeing many of you in person. In closing, I want to thank the Lear team for their tireless efforts that resulted in another strong quarter. I firmly believe we have the best team in the industry and I am proud to work with you each and every day.
of you in person. In closing, I want to thank the Lear team for their tireless efforts that resulted in another strong quarter. I firmly believe we have the best team in the industry and I am proud to work with you each and every day. Now we'd be happy to take your questions.
Ladies and gentlemen, we'll now begin that question and answer session.
To ask a question, you may press star and then one on your touchstone phones. If you are using a speakerphone, we do ask that you please pick up your handset prior to pressing the keys. If you are using a speakerphone, you may press star and then one on your touchstone phone.
To withdraw your questions, you may press star and two. Once again, that is star and then one to join the question queue. At this time, we will pause momentarily to assemble the roster.
Our first question comes from John Murphy from Bank of America. Please go ahead with your question.
Good morning guys. Maybe just ask one simple one first just on schedule stabilization. I'm just wondering if you could kind of highlight how much they've stabilized in the first quarter, how much sort of the disruption cost you last year and what you expect to not reoccur this year.
Well, actually this year, I always say everything is all relative. This year is a lot better than last year. We talked about just stable production from our customers. We're getting a lot better clarity around if there is going to be downtime so that we can respond a lot quicker in respect to what we can do internally from an efficiency standpoint.
premium costs in the quarter. It did improve versus the prior year. We've seen a gradual improvement, John , as you look at the first half of last year to the second half of last year and then again in the first quarter. As Ray mentioned, we're still incurring some premium costs. We're still seeing some stop-start production from our customers, some challenges with some of the new programs that our customers are changing over.
and some challenges with our supply base, which weighs a little bit on the conversion rates you see with volume and the backlog, but certainly less meaningful than what we experienced over the last two years.
And then just the second question on IGB in the acquisition there, is there a greater opportunity on on content with EVs as you're looking at sort of the in-seat HVAC systems essentially versus what you have on the ICE and I think you also I just want to follow up on something I think you mentioned that you said seedy margins which are targeted at seven and a half to eight and a half percent eventually.
You know there could be upside to that seven and a half to eight and a half percent because of IGV I just wanted to kind of clarify that statement as well or confirm it. Yeah, John . I'm glad you asked the question. One, I couldn't be more excited. This is a big day for Lear Corporation. This has been 10 years in the works and you know going back we're just discussing amongst the team here before.
All those elements are particularly of interest to our customers on EV vehicles. One, just the draw of and use of the battery consumption, the better use of the combination of HVAC and SEED for the occupant within the SEED. The packaging that we're going to be able to...
proliferate these, I think, across multiple different seat sets. And I think equally as important, not just luxury vehicles, but be able to use them in more mid-vehicle ranges because we're going to have a much more efficient system. So short term, we're looking at this thing. It is just we have this in three phases. One is just doing a really good job with our purchasing leverage, the ability to scale.
We believe that that's going to allow us to grow. And those components that we're referring to are accretive in respect to margins. So our goal is to offer our customers a great value proposition, but also more importantly to us is expand our margin. And that's really the intent of this and it really culminated in the...
Acquisition of IGB, Conchburg was a great acquisition, IGB is a great acquisition, but now we're well rounded in what we're going to do as far as priceable features within the SEATS system.
The only thing I would add, Ray, to what was important about IGB, it brought steering wheel heat and panel heating, which I think also plays an important role as you think about reducing the use of the HVAC and the impact on the battery and shifting that to other parts of the interior that are more efficient for heating and cooling the occupant. So that's important. That's where angels come in.
Additional product capabilities that we were after with IGV. You know John we talked about the investor day we're going to have too. We don't share a lot publicly for competitive reasons. But when you see what we're talking about as far as the transformational change of the components, we put this in front of the customer's frames here.
It's a layup. I mean, it's amazing. It is un-
It's not traditional for us to get 100% of sourcing control on these programs. We're getting it because of the acquisitions we've made and the capabilities we have and the vision of the value that we can create. And so at the investor day we are really excited about being able to disclose a little bit more about what we've been working on for over 10 years.
and the change to the seed system and how we believe that can, you know, I think this two and a half to three billion dollar market can grow faster when you actually have a system that creates a significant value for your customers. And if I could just sneak one more in on the ICB and Tricel Connect boards, you seem like you're winning more and more on the Altium platform. And that is a.
platform. So I'm just curious when you think about that, you know, how much share you have on that Ultimia platform as far as you can tell on what you've won so far. I mean is that being dual sourced or are you you sole sourced on that? What's the story there? It's dual sourced today and we have a strong position with General Motors on that particular component.
Okay, great. Thank you very much guys. And our next question comes from Rod Lash from Wolf Research. Please go ahead with your question.
Good morning everybody.
So I had a couple things I wanted to ask about. The eSystems margins currently running at 3.5%. You had guided to 4.5% for the year. And I was just hoping you could give us a little bit of color on what changes from here.
Thoughts on incremental margins, does your guidance still hold because obviously the exit rate would be quite a bit higher to make it average that. And then on seeding, is it typical that incremental margins on new business would come in in the mid sixes or is that something that we should extrapolate from?
Yeah, we'll start with the second part of the question first, Rod. So seeding backlog has been rolling on in the 8 to 10% range, and I think if you look out over the next couple of years, we would anticipate that that's about the rate it would roll on. Sometimes you have a blip and a quarter where...
are seeing, if you look at the last number of quarters, that's what we've converted at. In terms of these systems margins, you're right. We do expect to see higher margins in the second half of the year than the first half of the year, so at 3 and 1 0.5% here in the first quarter. If we look out in the second quarter, the midpoint of our guidance
We would expect similar margins, maybe slightly higher in these systems in the second quarter, which means the second half needs to be roughly 5.5%. There's a number of catalysts to that. One, our launch costs in the first half of the year are much higher than they'll be in the second half of the year we're going through, not just launching the backlog, but we had significant new program changeovers. So the Ford Escape, which I referenced in the prepared remarks.
But also the Colorado Canyon with GM is a big program for e-systems. So those two programs we had a significant investment in launch costs in the beginning part of the year. And that will be less in the second half of the year. In addition to that, we are in deep discussions, negotiations with our customers So no stealing from the let's say let's say let's say I now all my best friends and my ex are at home and running a fastuan DevOps platform
commodity and inflation recovery. We did a nice job in the quarter, but we have a lot of work to do there and we were confident that we'll achieve the assumptions that we've outlined for commodities and these systems for the full year. In addition to that, you have your normal seasonality and so you had.
the LTA agreements that are contractual that we approved in the first part of the year, first quarter, second quarter that get negotiated throughout the year, and then offset through our own cost reduction actions, restructuring actions, normal plant efficiencies, purchase savings with our supply base.
And as is typically the case, particularly in these systems, you see that stuff sort of layered on throughout the year. And those things taken together, we believe, get us to about 5.5% for the second half of the year. And I would say the range is 5.5% to 6% in the fourth quarter, maybe even a little bit beyond that as we exit the year. And it's
And it sounded like there's a little bit of caution in your tone.
not surprising in light of macro, but you had it given an indication about potentially coming in at the higher end of your guidance range earlier in the year. Are you seeing anything in terms of customer schedules or mix that is...
Is it resulting in that or is that just conservatism? Yeah, I would characterize it more as caution and conservatism at this stage. Nothing has changed from when I spoke at an investor conference earlier in the quarter. As we sit here today, if …
the conditions from the first quarter hold up for the balance of the year and there isn't a significant pullback in demand that impacts production or disruption due to the labor negotiations in the US and Canada that impacts production. If those things don't happen, then we see a lot of
the revenue at the high end of the guidance range, maybe even a little bit beyond that. Now, provide a little bit more color on that point is kind of an important point. So we have a relatively conservative assumption on foreign exchange, you know, at 105 for the full year, for 107 in the first quarter.
So that implies a little less than $105 for the balance of the year. And if you just kind of modeled out the last five days average exchange rates, revenue would be about $300 million higher than what we have included in the guidance. And that would convert at the company margin overall.
In addition to that, you asked about commodities. One thing that we experienced in the first quarter that we now are expecting to continue is elevated revenue as both are the directed suppliers, so suppliers that our customers source directly and negotiate pricing directly with are getting price increases and we're just kind of an administrator in the middle.
taken together and the fact that IGV closed a little bit earlier, you know we see about five to six hundred million of sort of revenue tailwinds that may not have a lot of earnings associated with that. So we may see if conditions hold up consistent with the first quarter revenue that's at or above the high end of the range.
with earnings that are at the high end or maybe a little bit lower than that as some new developments happen with commodities. So then speaking specifically about commodities, what's changed from our original guidance there, we lock in our North America steel price one quarter at a time. And so the first quarter was really based on the fourth quarter. We saw a nice.
reduction and nice benefit in the first quarter. Second quarter is based on the average price in the first quarter, so that is going up sequentially. We've assumed that that sort of continues in the second half and then by the fourth quarter it comes back down. Based on that assumption, the net effect for steel.
instead of being a $30 million benefit, is now about a $20 million benefit. So a little bit of an impact for the unrecovered portion of steel. We're seeing some favorability in chemical costs, freight and logistics, and that's helping to offset the higher steel. And then we're seeing some pressure on component costs.
Again, more so in these systems than in seeding, particularly with insulated wire. That part of the supply base is a bit more challenged. I think you see evidence of that, the challenges with the Leoni that are very public. And so we are seeing some pressure on cost there, but we're also working with our customers on negotiating, sharing the paths for agreement on that.
Thanks for that. Just to clarify, you didn't mention any transactional impact from the FX? I'm just giving your peso exposure. Is that essentially hedged?
Yeah, so for the full year we're about 85% hedged on the pay, so most of our currency pairs were 60 to 85% sort of the range. We were a little less hedged in the first quarter, so we just see a little impact there. We don't see it as significant for the full year at this point in time. We have a rolling...
24-month hedge program, so we've locked in about 40% of that exposure for next year as well, which should help. But, you know, so as we sit here today, it's not a meaningful issue. It's maybe $10 million for the full year relative to what we expected at the start of the year. Thank you.
And our next question comes from Dan Levy from Barclays. Please go ahead with your question. Hi, good morning. Thank you for taking the question. Sorry, I jumped on late and I know you talked a bit about e-systems, but maybe you could just address in the quarter, you know, the conversion was...
on volume mix and on backlog was just meaningfully lower than what you'd seen in prior quarters. So maybe you could just get a bit into the conversion on e-systems within the quarter.
Yeah, part of that is the mix of revenue by region and so in North America, we tend to have a little higher variable margin profile than in Europe and in Asia. And so given the changeover activity on these...
key platforms like the Ford Escape and the GM Colorado Canyon pick up program. So revenue was down on those and up on our European programs and a little bit in Asia. And so that's really the driver to sort of mix the program by region.
Backlog, as we look out for the balance of the year, we expect that to continue to roll on sort of the 10% range in these systems. So we feel pretty good about how the backlog is rolling on. You can see that as continuing to be accreted to margins in these systems.
Understood. Thank you. And then just as a follow-up, I know you said that for commodities you're now assuming $20 million for the overseas supplier outlook, $30 million tailwind. Maybe you could just remind us within that number what you're assuming on recoveries for non-federal. Go ahead,
raw material items, be it maybe some of the pass-through components which you said you're seeing some recoveries there or freight or most notably labor on your end. Are you assuming within that recoveries for labor where I know you would assume that there was going to be some wage inflation on your side?
Yeah, I think, Dan, at this point, we want to be a bit careful on that for competitive reasons, but we are in negotiations with our customer on labor. And oftentimes in both business segments, we work with models that our customers have. And so the model has a labor rate input, and so that is certainly.
provide an opportunity for us to have a dialogue with our customers. There's a certain level of wage inflation that's our responsibility. We experience that each year and we offset it through productivity. What we're after is really the extraordinary wage inflation in places like Mexico where there was a significant increase.
in wage costs. In terms of the component cost increases and recovery of that, we're expecting between 90-95% of that will be recovered within the year. So we're not expecting that to be a significant headwind. We're expecting nearly 100% on the seating side because most of that is on direct...
that. That's the net. They're a gross number.
Our gross impact for this year, we're estimating at this point, is about 200 million.
Okay, got it. Thank you. You're welcome. And our next question comes from James Piccarillo from BNP Paribas. Please go ahead with your question.
Okay, got it. Thank you. You're welcome. And our next question comes from James Piccarillo from BNP Paribas. Please go ahead with your question. Hi, good morning, everyone.
Good morning. So on the e-systems commodities and component sourcing headwind, the five or six million headwind for the quarter, can you just confirm what does that impact look like through the rest of the year for e-systems? Yeah, we see it as a little less for the balance of the year than it was in the first quarter. I think the first and second quarter will be similar.
break tied to the lessening effect in the second half or is it just
expectation on pricing. It's recovery that drives the difference first half to second half. Okay and then for IGB will the initial contribution margin for that business trend similarly to what we saw with Kongsburg last year losing about five million a quarter initially.
slight change in this, but we do expect the margins in thermal comfort to be roughly break even this year. And we're going through some restructuring now. We referenced the purchasing synergies. We're seeing some opportunities there. And so we're on track for
for the combined business to be profitable next year. We had talked originally about it being a creative deceit margins in 24. We still see that probably in the second half or towards the tail end of 24 because it just took longer for the IGV regulatory approval and closing to get over the finish line. So.
When we talked about 24 being accretive, we had assumed that that point that it would be kind of the full year this year in our hands. And it's obviously four months later than that. So we still see this business being accretive to seat margins. And so I think contribution margins are going to be similar to seating or a little bit higher, so in the 20% range, 20%, 25% even on certain programs.
And so over time as we grow that business, it will, the impact on seed margins will continue to increase and culminate with pushing that 7.5 to 8.5% range above 8.5%. We'll save some of the details around that for the investor day in June . We're excited to talk about that in a little bit more detail.
what's assumed in there. Q1 played out a bit better than Q2.
expected and then you were even proving that back in March. But now based on the unchanged outlook, you'd be basically assuming some sequential deterioration in profit at midpoint or maybe stable versus the first quarter at the high end.
of the year play out? Where are the areas of caution that would essentially keep you a bit more cautious now? Yeah, I think the caution is just around the production volume assumption that we have a pretty good handle on the rest of the drivers. Just so mechanically, by holding the full year with such a strong first quarter, what it suggests is that...
Again, it's early, there's so many geopolitical, macroeconomic factors in play, we just thought it was prudent to hold serve at this point. And if conditions hold up like the first quarter, we would certainly look to raise our outlook on the second quarter earnings call.
Understood. And I guess one follow-up on e-systems. Based on your outlook, maybe even like 5.5% margin in the second half, obviously quite a bit more upside needed towards some of your you know, midterm target. So as we look past, I guess the second half of the fourth quarter...
We've described sort of that bridge from 4.5% this year to 8% in 2025. So you can look at it two different ways. One way is just looking at sort of volume and backlog. We see that as 250 basis points of the improvement from 23 to 25 and then 100 basis points of net performance. So this year –
You know, net performance is sort of negligible in both segments. We see it as 50 basis points positive in 24 and 25 through a combination of lower inflation, some continued success on passing through higher commodity costs, and just fully realizing the benefits of our restructuring program and other cost reduction initiatives without that added weight of.
extraordinarily high wage inflation that we saw this year. You know, another way to look and to think about these systems progression from 23 to 25, if you look at a by business segment, you know, we talked about 100 basis points of the improvement being driven by the growth and connection systems. Certainly www the
this additional volume with GM on the Intersil Connect board helps there. So we had previously expected $285 million of additional revenue there. It's going to be a little bit more than that now with the additional volume award on that platform. That's 100 basis points. You look at our core electronics and what we're doing with that business, we see 125 basis points of margin growth over that two-year time period in electronics. And then
That sort of leaves 125 basis points for the wire business, which is a combination of net performance and stronger volumes. Johnathan, thank you so much. Thanks. Our next question comes from Colin Langan from Wells Fargo. Please go ahead with your question. Oh, great. Thanks for taking my questions. Just wanted to follow up. I'm not sure if I heard it right. You said there's $200 million of gross commodity headwind, but I still expect a net positive of 20.
I'm a little confused because I thought back in 21 there was about 450 and you got 185 net. So what gives you – one, did I mishear that? And two, what gives you confidence that you could sort of get that much recovery versus the past? Are the contracts different now given the last couple of years' changes?
Well, part of it is the lag effect. So you're seeing some recovery in the first part of this year, for example, that relates to higher steel costs that existed last year. And so there's a bit of a lag benefit that we're seeing. And the balance of it really is, you know, we've worked hard to get as many of our Parsons for Ever Enforcement as we can for a moment, but overall it's got a really great expression, 10 percent.
components on an indexing agreement as we can to try and kind of insulate us from that risk. And so as there are changes that take place, that makes it a little bit more straightforward to pass. It does make it easy looking at Carl and Frank, it's certainly a ton of work by the team on both business segments. The other big factor though, probably the more important factor is that...
we see about 180 million of directed supplier increases where it's just a one for one pass through. So that's really what's driving the increase. And so there's no impact on OI. So it's 100% pass through. So it's a little bit misleading from that standpoint. You know, and if you go back to what we anticipated at the beginning of the year, we expected the gross impact to be, you know, favorable. So 105 million because of what was happening with steel. And so now that has swung all the way in the other direction where.
We're seeing the gross impact that's unfavorable by 200 million. That's a $300 million change again and with 180 million of that in seeding on directed suppliers that's just passed through.
Got it, okay. And then the last quarter you talked about 85 million in gross labor cost headwinds. That's incremental to the 200 you're talking about in commodities, right? They're not overlapping. And then any color on how that's progressing, has the majority of that already hit? So you're working to get recoveries through the rest of the year on that? Or does more of that come later in the year?
The labor inflation on the hourly side mostly has began the year. Now some of the salary programs have various effective dates around the world, but some are in January and some are later. The discussions with the customers started in the first quarter.
and will continue, I think, through the balance of the year. It's not gonna be all done in the second quarter. It's gonna take time. And some of it could even leak into next year. So it's a difficult discussion with the customers and ultimately we have to be the most competitive option for them and we are. We have.
world-class footprint in both segments and I think that's supportive of our negotiations to pass these excess costs through over time. Just one quick follow-up. Where does that fall in the walks? Is that under net performance? If I look at slide 15... Yes it's over...
footprint in both segments and I think that's supportive of our negotiations to pass these excess costs through over time. Just one quick follow up. Where does that fall in the walks? Is that under net performance if I look at slide 15 and 16? Because I don't even think...
think that's supportive of our negotiations to pass these excess costs through over time. Just one quick follow up. Where does that fall in the walks? Is that under net performance if I look at slide 15 and 16? Because I don't even think there's net performance on 15.
across the board it's still heavy push from all of our customers on EV and it was some customers even additional capacity in quotes are out for additional volume. So we haven't seen the demand side change at all from our perspective particularly with the talking to the OEM so no changes.
Okay, thank you. And then a quick follow-up. Can you say that the chip shortage is over now? Or is there still incremental production of the network?
Yeah, I'm hesitant. That one's engraved in me for a long time. I I think we're in a much better position What I'll tell you is that what we're experienced is You know, there's still at the brokers there's premium costs that we're trying to negotiate There might be chips are available through other outlets that we can get our hands on but there's still premiums associated with those chips so that hasn't
necessarily dissipated. But I'd say generally, and I think it's all relative to where we were a year ago, we're in a much better position. There's still certain chips that are tougher to get, but I think holistically across all chips, we're in a much better position. Great. Thank you so much. Yeah, thank you. Is that the last one? OK, so I think, Jason, nice job today. Really nice job. That's a lot of heavy lifting for you. But then I showed the team here.
Appreciate all the hard work for everyone left on the phone the layer team incredible quarter. I Appreciate all the hard work that you're doing every single day Really good work. And again, just want to welcome the IGB family into the layer family. We're really excited I mean, this could be a transformational change for us We're been working on this for over 10 years and I think that the two very strategic You know acquisitions of IGB and Kongberg were complete we can now move on this thing and Franklin get those margins up and so far Let's get to work you guys appreciate everything. Thank you
Ladies and gentlemen, with that we'll conclude today's conference call and presentation. We thank you for attending. You may now disconnect your lines.